Dawei: To Be Or Not To Be
BMI View : Several events since the start of 2012 have conspired to scuttle the US$50bn Dawei maritime hub project in Myanmar, but recent developments suggest that the project is closer than ever to being implemented. In our opinion, the project's superior geographical position means that it would be difficult for Thailand to ignore its advantages, and we continue to believe that the project will take shape over the coming years.
The US$50bn Dawei maritime hub project in Myanmar, spearheaded by Thailand's largest construction company Italian-Thai Development (ITD), has been in limbo for quite some time. Several events since the start of 2012 have conspired to scuttle the project ( see our online service, January 12, 'Dawei Power Plant Suspension Justifies Cautious Outlook', March 20, 'New Port Strategy Aimed At Speeding Up Progress For Dawei', and July 6, 'Max Departure Questions Dawei Viability'), which include the cancellation of a plan to build a 4000-megawatt (MW) coal-fired power plant in Dawei, the withdrawal of a key domestic partner Max Myanmar from the Dawei project, the development of another two maritime hubs in Myanmar (ie, the Thilawa and Kyaukphyu special economic zones) and the re-evaluation of Thailand's port infrastructure strategy.
Nevertheless, a series of important developments in recent months have served to bolster the likelihood of project implementation, in our view.
Government Support Steps Up: In late September, a meeting between the leaders of Thailand and Myanmar saw both parties reach an agreement to expedite the development of the Dawei project. Bangkok and Naypyidaw will jointly form several committees to develop plans surrounding key aspects of the project. These committees will be headed by the relevant ministers in each country and will be coordinated by Thailand's National Economic and Social Development Board. The details on these plans are expected to be made clearer in November, when an announcement by both governments will be made during the ASEAN Summit in Cambodia.
This is positive news for the Dawei project. Since ITD was first awarded the concession for the Dawei project in November 2010, it has been unsuccessful in securing the US$8.5bn needed for the first phase of the project or resolving key sticking points with the Myanmar government (such as the type of electricity generation). With greater government support, ITD could finally resolve these hurdles and lay out an investment plan that is attractive to foreign investors.
Japan To Finance: In fact, It appears that Japan is set to provide a sizeable portion of the financing for the Dawei project. Although the country has recently formed a consortium with Myanmar to develop the Thilawa special economic zone (located close to Yangon), several parties directly involved in the project have announced over the past month that Japan will provide loans of up to US$3.2bn for Dawei itself. Negotiations between Japan and ITD for the loans has been ongoing since ITD was awarded the Dawei project, but have only moved forward after a visit to Japan by Myanmar's President Thein Sein in April.
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Coal Back On The Table: In late September, Chairman for the Dawei special business zone (SEZ) project, Thura U Thaung Lwin, announced that earlier plans to construct a 4000MW coal plant at the SEZ had been replaced by a plan to construct a 400MW power plant that would utilise clean-coal technology. He added that this form of electricity generation, to be developed with Japanese expertise, would be acceptable to the Myanmar government. This is positive news for the Dawei project. In a country beset by chronic power shortages, the need to establish a stable source of electricity is crucial for the project to be successfully implemented.
Dawei Alternatives Grow Dimmer: In late September, Thailand's Transport Minister, Charupong Ruangsuwan, said that his ministry would consider delaying or cancelling the plan to construct the third phase of the Laem Chabang deep-sea port project in Pattaya and the Pak Bara port project in south Thailand. This is because the country's private sector had expressed a preference for a port to be constructed in Map Ta Phut, and that there were growing concerns about the environmental problems that could arise from expanding and developing the Laem Chabang and Pak Bara ports respectively. Thailand had earlier this year considered developing the Laem Chabang port into a regional trading hub - a role originally envisaged for the Dawei port - but this plan looks increasingly unlikely to be realised.
Peace Prevailing: The political situation in south-eastern Myanmar (the location of the Dawei project) is improving. The Karen National Union (KNU), the local ethnic minority rebel group, agreed to a truce with the Myanmar government in January 2012 and both parties are currently holding peace talks - the third official round of peace talks took place in late August. While we note that the situation with the KNU is still volatile, the fact that both parties are willing to hold discussions bodes well for the outlook of the Dawei project.
Will It Happen? We Believe So
Given these positive developments, we are optimistic that the Dawei project is closer than ever to being implemented. We have long held the view that the fundamentals for the project mean that Thai companies, in particular, can ill-afford to give up on the project. Not only is the Dawei project ideally located for nearby regions (such as Laos, Cambodia, Thailand, Vietnam, and South China) to transport their goods to the West, but it will also allow companies in the region to completely bypass the congested Malacca Straits.
Having said that, there still exists downside risks for the project and these primarily stem from the government's poor regulatory framework. According to report by UK-based firm Maplecroft, Myanmar offers the least legal protection for foreign companies and investors out of 197 countries. Although the government is set to approve a new bill in November 2012 that will provide clarity towards foreign investment, the bill has been delayed repeatedly and it remains to be seen whether it will pass.
At present, a dirt road has already been constructed to link Dawei with the Thai border as well as a small, temporary port to bring in construction materials for the project. The pre-construction stages have also been carried out. The environmental impact study has been completed, while the land acquisition has also started, with houses currently being built for the affected villagers. ITD is expected to start construction on the deep-sea port and the expressway link to Thailand in 2013.